Rupee under pressure: SBI Research wants RBI to prioritise currency stability alongside inflation
Why currency management is becoming critical
The report points to a changing global financial environment, with a resurgent US dollar, uncertainty over the Federal Reserve’s interest rate trajectory and rising international bond yields influencing capital flows.
SBI Research noted that emerging market currencies are particularly vulnerable to energy price shocks and heightened volatility. Rising financing costs and reduced availability of capital could also affect investment and consumption.
The report said exchange rate management has gained importance alongside inflation expectations management as global financial liquidity becomes more volatile and expensive.
Pressure is also visible in the non-deliverable forward (NDF) market, where participants hedge currency exposure. According to the report, short-term forward market costs have risen sharply, with annualised costs at times reaching twice those at the longer end of the curve.
SBI Research warned that elevated short-term hedging costs, combined with importer demand and speculative positioning, could push spot exchange rates away from levels justified by underlying economic fundamentals.
SBI Research proposes tighter export proceeds timelines
To improve foreign exchange management, SBI Research has recommended reducing the standard timeline for realisation of export proceeds from around 15 months to six months, with extensions permitted on a case-by-case basis.
The report also called for exporters to align their foreign exchange receipts and remittances more closely with importers’ requirements and hedging patterns. Deliberate delays in bringing export proceeds into the country could attract deterrent measures, it suggested.
These steps, according to the report, could help improve the availability and timing of foreign exchange flows in a market experiencing heightened volatility.
SBI Research’s key recommendations for the RBI
|
Issue |
SBI Research’s recommendation |
Objective |
|---|---|---|
|
Rupee volatility |
Strengthen exchange rate management |
Reduce currency volatility and support financial stability |
|
Monetary policy |
Consider a 50-basis-point rate hike |
Address persistent global financial pressures |
|
Liquidity management |
Widen the LAF corridor from the current 50 basis points |
Manage liquidity during periods of market stress |
|
Export proceeds |
Reduce the standard realisation timeline from around 15 months to six months |
Improve the availability of foreign exchange |
|
Exporter-importer flows |
Align export receipts and remittances more closely with importers’ needs |
Improve foreign exchange flow management |
|
Delayed receipts |
Consider deterrent measures against deliberate delays |
Encourage timely realisation of export proceeds |
|
Capital inflows |
Review tax and capital gains structures |
Attract long-term capital into debt and equity markets |
|
Policy communication |
Provide clear, consistent and credible signals |
Anchor market expectations and strengthen policy credibility |
Source: SBI Research, Ecowrap
The trade-off between the rupee, inflation and growth
Currency stability matters because rupee depreciation can raise the domestic cost of imported commodities, including crude oil, potentially adding to inflationary pressures. Greater exchange rate volatility can also increase hedging expenses for businesses and complicate investment decisions.
However, stronger monetary tightening to support the currency could raise borrowing costs for households and companies, potentially slowing credit demand, consumption and investment.
SBI Research has separately advocated a possible 50-basis-point rate hike and a temporary widening of the RBI’s liquidity adjustment facility corridor to address financial market stress.
The report also urged the government to review tax and capital gains structures to attract more long-term capital into Indian debt and equity markets.
Ultimately, SBI Research argues that currency management, monetary policy and capital flow measures need to work together to preserve financial stability. The challenge for the RBI will be to contain external pressures without imposing excessive costs on domestic economic growth.
